Basic Accounting Terms

The following are the basic accounting terms that are used in business.

1) Capital : 

The amount which is invested by the proprietor in a business is called capital. In other words, It is the excess amount of assets over external liabilities (i.e. C=A-L).

2) Assets: 

Any property of possession of the business is called assets. Plant, machinery, land, cash in hand, cash at bank, bills receivable, debtors, etc. are some examples of assets. The following are the different types of assets:

a) Current Assets:

Those assets which can be converted into cash within short period of time or within an accounting period are called current assets. Cash in hand, cash at bank, bills receivable, debtors, etc. are some current assets.

b) Fixed Assets:

Those assets which is used for long time in business but not sale is called fixed assets.They are acquired to generate future earning. Land, building, machinery, trademark, patent, etc. are some examples of fixed assets. Fixed assets are further divided into two types;

i) Tangible Fixed Assets: 

Those fixed assets which have physical existence and can be seen and touched are tangible fixed assets. These are used in operation of business. Land and building, plant and machinery, furniture, etc. are some tangible fixed assets.

ii) Intangible Fixed Assets: 

Those fixed assets which do not have any physical shape and cannot be seen and touched but still have its monetary value and can be sold and purchased in market is called Intangible Fixed Assets. Goodwill, trademarks, patents, etc. are some examples of Intangible Fixed Assets.

3) Liabilities: 

Liabilities means the amount owing to outsiders who are not owners. In other words, the debts that are due by the firm to other parties are collectively known as liabilities. Creditors, Bank overdraft, bank loan, etc are some liabilities.

There are two types of liabilities. They are;

i) Long Term Liabilities: 

Those liabilities which are repaid after a long period are called Long Term Liabilities. Loan from bank, debentures, mortgages, capital etc. are some long term liabilities.

ii) Current Liabilities: 

Those liabilities which are paid normally with in a short period or within an accounting period are called current liabilities. It is also known as short liabilities. Bills payable, creditors, bank overdraft, outstanding expenses etc. are some current liabilities.

4) Drawing: 

Money or goods belonging to business withdrawn by a proprietor for his/her personal use or domestic use is called drawing. It reduces the capital of the business.

5) Revenue: 

Revenue is the sum of money received or to be received from the customer or clients of a business as a result of sale of goods or services or both.

6) Debtors: 

A person or an organization that owes money to the business mainly on account of credit sale of goods or rendering of services is a debtor. Debtors are current assets as they are expected to be collected within short period.

7) Creditors:

Those person or organizations who has provided credit to an organization or individual are called Creditors.

8) Financial Transactions:

Those transactions which are related with money are called financial transactions.

9) Bank Overdraft:

When amount withdrawn from bank is more than the amount deposited in bank, the excess amount is called bank overdraft. Such facility is given only for few reliable customers in a certain rate of interest.

10) Insolvent: 

Those person or parties who are declared by the the court of law that they are economically unable to pay out their liabilities are said be insolvent.

11) Goodwill: 

Goodwill is an intangible asset representing non-physical items that add to a company's value but cannot be easily identified. It is excess of the price paid for a business as a whole over its book value, or over the computed or agreed value of all tangible net assets purchased. It denotes to the reputation of the organization that is treated as an intangible asset.

12) Patent:

It refers to that right granted to firm by government to produce particular products. No other company is allowed to manufacture the same without permission of it. Patent is an intangible asset.